For the Chinese companies investing in these Western
automotive firms, the allure is fairly obvious; they are purchasing the
technological know-how they need to fall in line with the new regulations – the
first
phase of these regulations comes into force in 2019 and requires firms to,
essentially, contribute to the phasing out of fossil-fuelled powered cars.
There are also issues in relation to the relatively low number of exports on
behalf of Chinese automotive manufacturers, with recent
endeavours resulting in very little progress; the sentiment is that by
potentially incorporating this technological know-how Chinese cars will be seen
as much more viable options for car purchasers around the world. For
non-Chinese firms, the need to work with Chinese companies is both enforced on
one hand, and sensible on the other. Non-Chinese companies must work with a
Chinese enterprise to bring their products to the Chinese market by way of Chinese
regulations, but the suspected development of the automotive marketplace in
China over the next few decades makes for incredible investment opportunities
for foreign firms; the world’s largest car market now, is predicted to grow
substantially, with the usage
of electric vehicles estimated to stand at 176 million cars in China alone by
2040 (equating to 46% of all cars on Chinese roads). Volkswagen’s recent
$12 billion investment in electric vehicles within the Chinese market is just
the latest demonstration of non-Chinese companies realising the immense
potential that the Chinese regulations will bring to the industry. However,
what may be the effect of this phase?

Ultimately, but certainly not definitively, there is a
potential shift in the midst. The increased investment into the Chinese ‘infrastructure’
in this particular industry carries a gamble for these non-Chinese companies,
and that is mostly based upon ‘brand-power’; Chinese endeavours outside of
their own market have fallen short mostly because of a perception surrounding
the quality of the products being offered, but if the product is enhanced
significantly (as this wave of investment will surely do), then competition in
this tight-knit marketplace may be about to explode. If that happens, on the
basis that the divergence created by ‘brand-power’ will be reduced, then there
are likely to be many casualties, with a number of ‘well-known’ automotive
brands being enveloped within the larger conglomerates; Geely Chairman Li Shufu’s
declaration that he is attempting to build a ‘new Volkswagen’ is a telling one,
with the potential for just a very small number of massive conglomerates ruling
the industry becoming that much more of a reality.

Tuesday, 20 February 2018

Before this post starts with any preamble, it is important
to note a couple of things. Firstly, this post will not be covering the issue
in tremendous depth, mostly because the issue is so large that to attempt to do
so in this forum would not do the issue any justice at all – there are many
fabulous campaigners that do the issue tremendous justice on account of their
continuous and tireless campaign against what is now confirmed as being a
systemic issue (see @Spandavia and @Ian_Fraser for just two excellent
examples of this). The second thing to note is that the report, which we will
focus on in this post, is particularly extensive and requires a thorough
examination (the report can be found here).
With those aspects acknowledged, what this post will do is look at some of the ramifications
from the report, the scenario within which it was released (which is a
remarkable story in itself), and also what it potentially tells us about the
relationship between the regulator and the regulated.

Earlier this month we looked at the ever-increasing
angst that RBS and its ‘Global Restructuring Group’ was causing within
regulatory circles. This is not to say that the regulator responsible, the FCA,
was showing much concern on this issue, but that the Treasury Select Committee
was putting the FCA under considerable pressure to release the full report,
without redactions, in the light of building public pressure to do so. The
Committee gave the FCA until Friday to comply and, rather predictably, it did
not; today the Committee stayed true to its word and released the report, in
full, after a long and storied battle with the regulator who, lest we forget,
is tasked with protecting consumers and not the regulated. The report,
which spans 362 pages, was commissioned by the FCA but, as we know, was only
released in what can only be described as ‘abstract’ form. Whilst the report is
extensive, it does not take long to find some of the highlights, and they are
particularly damning for RBS and now, by way of contamination on the back of
their poor performance, the FCA. On page 119, in relation to an assessment of
the GRG’s operating objectives, the report states that there were ‘clear risks
to customers inherent in the GRG model. Whilst the existence of a commercial
objective was not inappropriate of itself, it gave rise to inherent potential
conflicts of interests and risks to customers. That was exacerbated by the way
in which GRG was required to be a “major contributor” to the bottom line and a
profit centre’. Whilst acknowledging that working for profit is not
appropriate, this extract suggests that this fact was taken as read and that,
in fact, the GRG was operating to bring in major
revenues at the cost of the troubled SMEs – it is worth noting that this issue,
that the ‘customers’ of GRG were, as a rule, struggling SMEs, is an extremely
important aspect of the story and one that needs to be kept at the very
forefront of every examination into this debacle. The report acknowledges these
aspects in the surrounding pages, and makes note on page 120 that there were
serious governance issues, including a lack of oversight as to GRG’s processes,
a lack of identification of the key risks facing GRG customers, and ultimately
a lack of opportunity for redress and organisational reorganisation on the back
of failings.

Moving ahead abruptly to page 265, the report is keen to
note that one of the ways in which the GRG maintained its operations was to
play fast and loose with the methodological aspects of assessing the ‘success’
of the group, particularly in relation to the outcome for its ‘customers’. This
was that much of an issue, in fact, that the report had to alter the
methodologies used just to gain some sort of understanding as to the outcome
for the GRG’s customers, with its findings declaring that, on page 266, the data
put forward by GRG and RBS ‘appears not to reflect the reality for customers’
and, that ‘the way in which GRG measured and recorded the outcomes of the SME
cases it handled gave a misleading impression from a customer perspective’.
Yet, as was mentioned in the preamble, there is much more in this report which
needs to be digested. However, the noises made today upon publication also make
for a fascinating scenario whereby one of the premier regulators in the U.K. is
being openly (and correctly) rebuked for its performance.

That question leads directly onto an aspect raised today in
the media that ‘the FCA is winding up a second probe, which includes looking at
what management knew, or should have known’, which Morgan immediately responded
to by stating that ‘as
well as continuing to monitor the FCA’s further investigation into GRG, we’ll
keep a close eye on RBS’ Complaints Process…’. This aspect needs to be
considered, an incredibly critically, because the underlying sentiment to it is
remarkable. In essence, we were able to read today, with no help from the FCA,
that a major global bank had set up a department with the inherent
organisational objective of making as much money as possible from customers who
had to be struggling to be a ‘customer’.
In addition, when this was reported to the FCA, they refused to communicate this to the public and when pressed to do so
by politicians, they refused again. So, in light of that, is it really
appropriate to have the FCA conduct any more investigations into RBS? Leaving
aside issues of resources for one moment, the FCA has provided clear evidence
that, if it finds more wrongdoing, it cannot be guaranteed that it will release
the information; so why investigate at all? Is it really the case that there
has to be a sustained campaign and pressure from one of the most influential
parliamentary committees just to get information of wrongdoing released? The
impact of these developments upon the validity of the FCA as a regulator is
remarkable, and news today that the incoming head of the FCA – Charles Randall –
used a tax break scheme between 2006 and 2011 which was, according to him, an ‘error in judgement’,
makes things much worse.

This report has a number of lessons contained within it, and
whether or not those are learned is another matter entirely. Whilst there are
many lessons to be learned with regard to the ability of profit-making banks to
offer impartial and progressive assistance to struggling customers/SMEs, there
is a lesson for the regulatory framework that needs to be addressed. In short,
that lesson is that the FCA needs to be assessed thoroughly and its position
put under real question; this is a massive blow for its legitimacy. When the
Financial Services Authority was broken up, it was done so on the premise of
creating a more focused regulatory framework to better protect against the
excesses of the marketplace, and today’s report shows no such evidence of that.
Rather, today’s report signals clearly the existence of a close relationship
between the regulator and the regulated, with the loser in that relationship
being, as always, the ‘little people’ – regular readers of Financial Regulation Matters will not be surprised to hear this
author state that this is just not acceptable, but the reality is that this is
a systemic dynamic that seemingly only grows stronger, despite the increased
access to information that we all have. Yet, whilst a negative connotation, it
cannot be used to stop calls and action for a rebalance, and one place to start
is the FCA; its very legitimacy is hanging by a thread, and correctly so.

The case of Carillion has made for a number of posts here in
Financial Regulation Matters, ranging
from the commencement
of the crisis to the fallout, both in regards to the effect
upon the sector and also the effect
upon the pension fund and the protective framework that exists to protect
pension holders from these sorts of crises. However, news that broke today
concerning the performance of the pensions regulator in the U.K. and,
specifically, its performance in the previous few years regarding the
ever-deteriorating situation at Carillion has brought the pensions regulator’s
performance to the forefront of discussions. In today’s post, we will review
this breaking news and further examine the pensions regulator as, one would
assume, the crisis continues and associated authorities are dragged further into
the mire in relation to this massive collapse.

Rather than restart the examination of Carillion in any
great detail, it is best to start with the issue at hand. Today’s news consists
of warnings that were put forward by Carillion’s (Pension-related) Trustees,
which they
must do in relation to the relevant laws contained within the Companies Act of
2006 (section 898). However, whilst it appears that the trustees performed
as they should, the news today revolves around the notion that, despite a
number of warnings to the pension regulator about underfunding, and a generally
poor attitude by company bosses when concerning properly funding the company’s
pension schemes, those warnings
were not heeded by the regulator. When the warnings were acted upon,
details today reveal that the regulator did put pressure on the company to put
resources into the pension fund, albeit below the level requested by the
trustees. The story goes that the trustees had strongly suggested to the
company that it should provide £35 million a year for the fund to be properly
maintained, with the company only then offering to pay just £25 million; after
this was branded as ‘unacceptable’
by the trustees, the trustees returned with a further warning that
contributions totalling £65 million a year over a period of 14 years were what
was needed, with the company responding by offering just £33.4 million a year
over 15 years. It was at this point that the trustees sought the intervention
of the regulator; the regulator has responded by stating that they did
intervene, and that their pressure amounted to a ‘significant increase’ in
the amount of money that the company were willing to pay into the pension pot.
However, with the trustees claiming that the actual deficit in the fund was far
larger than Carillion bosses would admit to (it
has been revealed now that the likely deficit is just short of £1 billion),
the question now revolves around the regulator’s insistence that it applied
pressure, despite the fund’s deficit increasing beyond expected levels – the
regulator is due to give evidence to Parliamentary Committees next week.
Frank Field, who
we discussed yesterday, has suggested that he is expecting, or at least
hoping, that the pension regulator performs
more diligently in the attempted clawing back of some of the money that was
paid out in bonuses to company officials, although that comment represented
more of a dig at the regulator than an instruction. With the regulator facing
questions next week, the issue here is what the future may look like for the
regulator once the dust settles from the Carillion crisis.

The regulator’s actions, in presumably applying ‘pressure’
but not taking direct action, fundamentally places the regulator within the
conversation concerning the best way to move forward in light of such massive
corporate collapses. On the one hand, the regulator does have powers to
intervene, but was happy with the reported financial situation at the company
(admittedly, backed by auditor’s reports, which raises questions about the role
of auditors). However, the obvious issue with this is what is the point of the
regulator having these powers to intervene if they are not going to use them?
In this scenario, there is clear evidence of trustees raising the red flags,
operating according to procedure and taking the issue to the regulator, and
then the regulator not acting. Whilst it is not a case of right or wrong, for
the most part, it is clear to see that the warnings put forward by the trustees
were well founded. Perhaps, this is just the latest example of the pro-business
mantra developed by regulators that has come to encapsulate the current era;
siding with the business when there is any room for manoeuvre is, apparently,
the modus operandi of financial regulators and it is vital that this stops.
There is far too much evidence to demonstrate that whilst business needs to be
allowed to operate, having a pro-business attitude when regulating financial
entities causes substantial social problems, but yet it persists. The issues
raised by white-collar crime studies, like the almost absolute absence of
prosecution in these matters, are raised time and time again, and one wonders
what the breaking point may be to tip the scales, if at all.

Monday, 19 February 2018

This very brief post provides a small update on a continuing
story that
has been covered throughout here in Financial
Regulation Matters. Tesco has been in the news a lot recently, whether that
be on account of aiming to move
into the ‘discount supermarket’ marketplace, or on account of a massive
amount of job losses as the company goes through a restructuring process, both
on the shop
floor and across
management. However, our focus today will be on providing an update to the
ongoing attempted takeover of the wholesale firm Booker.

The proposed takeover of Bookers has been a protracted one,
and although
the deal has been given the go-ahead, slightly controversially, from
competition regulators, there are still a number of hurdles to clear before
the deal can be completed. Whilst the approval from the competition regulator
was a major hurdle, getting everybody on side is perhaps the largest hurdle
and, in that sense, the deal still has some way to go before it can cross the
finish line. This was demonstrated towards the end of last week when the
advisory firm Institutional Shareholder Services (ISS) advised Booker
shareholders to reject the deal as it is being proposed, on account of there
being, in their view, ‘limited
potential benefit’ for them as Booker shareholders, ultimately concluding
that the deal should be rejected in its current form.

This development follows Sandall Asset Management, who
themselves hold 1.75% on Booker, also declaring that they are against the
current deal, at least in its current form. For them, they believe
that the deal undervalues Booker significantly, with their claim being that
the company is worth between 255 and 265p per share, not the 205.3p currently
on offer from Tesco. To resolve the issue, Sandall Asset Management are calling
for the firm’s 2018 profits to be paid out, in full, as part of a closing dividend
to its shareholders to account for the envisioned loss; whether or not this
becomes a reality is another matter entirely – Tesco is currently only offering
65% of 2018’s profits as a closing dividend.

What this saga does show is the precarious nature of a
corporate takeover, and the many elements which must be in place before the
takeover is completed. What is likely going to be the case is that Tesco raises
their offer ever so slightly, with the offer then being just enough to tempt
doubters into taking what they can get over and above what has already been
suggested. However, it is worth paying close attention to developments within
Tesco in the coming months and years, because their restructuring that was
designed to right some of the wrongs committed under previous leaderships i.e.
an aggressive global expansion that did not have the desired effects, is well
under way and will see the famous store repositioned within the marketplace. If
we add to that the effects of the U.K.’s secession from the European Union and
the effect that may have upon consumer spending, how Tesco negotiates these
choppy waters may determine its future for quite some time.

Here in Financial
Regulation Matters we have focused upon Sir Philip Green and his vast
business empire on a number of occasions, with most posts assessing the downfall
of the British retailer ‘BHS’ and the subsequent fallout that spanned from
that. Frank
Field MP, who chairs the Parliamentary ‘Work and Pensions Select Committee’
has, by way of the Committee’s mandate, come into direct opposition with Green
over the collapse of BHS and the effect on its pension holders, and news today
suggests that they are yet again set to resume hostilities over Green’s
business plans; so, in this post, we will detail what is at issue this time and
look at some of the possible effects that may ensure from this continuation of
investigation.

The collapse of BHS, and Green’s involvement in the
reduction of its pension schemes beforehand, made for a spectacle that was
remarkable, but in reality not surprising. We covered
the account of Sir Philip Green taking a daring approach to being
questioned by Field’s Committee, with the result being that Green contributed
significantly, but not in full, to the pension schemes to bring about some sort
of parity after it was systematically reduced by the company’s leaders over a
period of years. Whilst questions were raised here regarding the effect
of that encounter, particularly in relation to the sentiments that resulted
- i.e. Green’s bluster was both demonstrative of a. his belief in his lack of
wrongdoing and b. his disregard for the threat posed to him, but also in
relation to the sentiments offered for Field, that taking on such a commercial
giant can reap the correct rewards – the outcome was to both secure a
significant portion of the lost pension funds for the pension holders, but also
to bring Green to the stage on account of his business dealings. It has been
noted recently that Green’s Arcadia company, that controls many high street
chains and has nearly
3,000 stores and 26,000 employees worldwide, is under increasing pressure
from online retailers that have forced their way into the marketplace but, of
course, with much less operating cost; as a result, news today suggests that
Green is considering
selling his company to a Chinese firm called Shandong Ruyi. However, for
Field, this raises concerns on the back of Green’s performance with BHS, and it
is for that reason that he has declared that his Committee will ‘look at the state of Sir
Philip Green’s pensions schemes and whether he can sell to whomever he wants…’.
Other reports suggest the reason for this concern, with one source stating that
it is widely rumoured that Arcadia’s
current pension deficit stands at almost £1 billion, which would add weight
to Field’s declaration that it is important to ‘find out what the position
is’ in relation to the current deficit held by Arcadia before any sale can
go through. However, leaving aside the merits of the Chinese company, who
have been making a concerted entrance into the European market of late, a
question posed by Journalists to Field is of more interest at the moment; Field
was asked whether this new investigation might be perceived by Green to be the
confirmation of a vendetta against him, with Field responding ‘I hope it doesn’t’. That
question from the journalist raises some very questions indeed.

On the one hand, it could look like a politician focusing
upon a business leader too much,
particularly as the BHS scandal and its fallout was so recent, but this is a
particularly poor vision to follow. Another way to examine developments would
be a politician, tasked with safeguarding vulnerable pension holders,
fulfilling his mandate that he was elected to carry out, and consistently protecting pension holders
against what has been demonstrated to be particularly venal behaviour. It is
quite illustrative of the problems within modern society that investigating a
business leader who has just had to settle to the tune of £350 million to
replenish funds that he and his company drained, and who sit on an apparently
gigantic pension deficit at the moment, is even potentially considered to be a ‘vendetta’;
it is not, and this shaping of the debate lends poorly to the integrity of
those who advance such degenerative arguments. In reality, Green should have to
declare, at a very early stage, his intentions with regards to the sale and
then a formal and thorough investigation should be commenced; it is very
unlikely that someone who operates in such a manner will leave the company in
great shape for its purchaser, and more importantly its employees. It will be
an interesting scene if Green is put in front of the Committee again, because
his appalling performance last time will surely not be repeated; this is,
however, a logical conclusion to make. The case is that, in reality, if Green
is put in front of the Committee again, he will likely be even worse, and this
come from his understanding that there is no real deterrent for someone in his
position; would Green ever face imprisonment for his actions? We know the
answer to that, and at best he faces a slight reduction in his substantial
wealth which, for a man in his mid-60s, is no real threat at all. Yet, whilst
that is a negative, the positive can be found in Field’s determination to
protect those who cannot protect themselves, and his actions in this continuing
case need to be the model moving
forward. Perhaps the word ‘vendetta’ is correct, but rather it needs to be a
vendetta against those who continue to plunder the system in the belief that
they will not be pursued.

Thursday, 15 February 2018

In today’s post, we will be
previewing an article produced by this author that was very recently published
in the Journal of Sustainable Finance & Investment (available here).
The article is concerned with recent developments within the ‘Principles of
Responsible Investment’ (PRI) initiative that is being undertaken by the U.N.,
with the focus being on the proposed incorporation of the leading credit rating
agencies (for the most part) and their products. The emphasis of the article is
on explaining the view that, based on the historical development of the credit
rating industry, inducting them into the potentially systemic-altering movement
carries with it great risk, and it is that risk that is analysed within the
article.

The article begins by not
explaining the developments within the PRI, but by examining a concept known as
‘rating addiction’. Using the literature to provide context for the concept, an
assessment is undertaken to examine how the leading rating agencies have been
correctly identified as being central
to the Financial Crisis (and many other issues) but have not only survived
through these socially-challenging periods, but actually prospered – the
article advances the claim that the reason for this phenomenon is ‘rating
addiction’ which, as one would likely surmise, relates to the notion that the
financial system is addicted to the
products and therefore the agencies, which has the effect of protecting the
agencies against any meaningful punishment for their actions. The article
examines the literature that discusses the concept of ‘ratings reliance’, which
is similar concept to ‘rating addiction’ in many ways but focuses more on the
regulators’ incorporation of the ratings into
their procedures for a number of elements, like bank capital requirements, for
example; the effect of this reliance has been, according to the literature, a
systemic-level of ‘outsourcing’ of regulatory responsibility to third-parties,
so much so that the regulators have come to ‘rely’ on the ratings. However, it
is arguable, and the article makes this distinction, that ‘reliance’ and
‘addiction’ are two separate phenomena, because ‘addiction’ carries the
connotation of the strong inability to remove oneself from the process – much
like a drug (or any other commonly witnessed addictions).

Upon declaring that rating
addiction does indeed exist, and is fact prevalent, the article goes on to
discuss the technical issue of whether ‘reliance’ and ‘addiction’ are indeed
separate, describe the same thing, or are different positions within the same
linear causal pattern. It is proposed in the article that rating addiction
supersedes everything else because, essentially, it predates the regulatory usage
of the products of the agencies. Using business history literature,
particularly that developed by Professor
Marc Flandreau and his doctoral colleagues, the article presents a picture
whereby, due to the economic landscape in antebellum America i.e. before the
American Civil War, it was the economy
that became addicted to the ratings of the agencies, and not a case whereby, as
others have suggested, regulators pushed the ratings onto the marketplace –
with the ratings being used to deal with the issues being raised by the
expansion of the United States, market participants began to realise that
ratings were the most cost-effective way of ensuring (to the greatest extent
possible) that credit extended to a person or a company would be repaid.
Flandreau discusses this at length across a number of fascinating articles, but
the conclusion to be drawn from his research is that, quite simply, the
regulators in 1933, and in 1975 (to note two key dates in the regulatory
induction of ratings; 1933 saw the Office of the Comptroller of the Currency
induct the ratings, and 1973 [later promulgated in 1975] saw the SEC formally
induce and protect the rating agencies into the modern marketplace) were responding to the marketplace, not influencing the marketplace;
understanding this dynamic is absolutely vital to understanding the reason why
agencies managed to prosper despite being widely identified as being key actors
in the Financial Crisis.

The above hints at the
viewpoint that is it actually investors and bond-offering organisations that
lay at the cause of rating addiction, which is to some extent true, and on that
basis the article then looks at why this may be. One of the key aspects that the
article examines is the concept of ‘agency’ and the related theories, which
provide a useful tool with which to examine the relationship between an
investor, their institutional investor, and the rating agencies. For example,
whilst in the 1840s when the first commercialised
rating agency came into being the
system involved lenders providing credit to other marketplace actors in a very
commercialised manner, the modern system relies on the constant flow of
resources; the clearest example to use is an institutional investor, like a
pension fund, whereby the ‘lender’ is made of a large number of dispersed
investors with relatively small funds, and partake in a system that has
investment managers who take the lead on who to lend to, why, and where. The
obvious problem with this scenario is that dispersed fund contributors would
find it difficult, and more importantly inefficient,
to monitor the actions of their ‘agents’ on a daily basis; the solution, within
the modern marketplace at least, has been to define parameters within which the
‘agents’ can act, with easily digestible and identifiable ‘ratings’ being a
common choice. On the other hand, to protect the system, regulatory (and
legislative) bodies have enforced rules that do the same thing but for different
reasons, which is why many institutional investors have their investing ability
capped by certain rating levels i.e. AAA, or the top ratings prescribed by the
relevant rating agency. Yet, as that is the case, the question is then what
does that mean when the investing system itself is changed, or at least being
proposed to change?

This issue of changing the
investing ‘system’ slightly exaggerates the proposals being put forward by the
PRI, but the sentiment is close enough. The initiative, which sees a number of
large investment practices come together to promote the increased incorporation
of sustainable investment practices, whereby key Environmental, Social, and Governance
(ESG) concerns are incorporated into investment practices, is essentially the
movement being developed by the PRI. In the article the proposals set forth by
the PRI are discussed in detail, but the result of that examination is to
assess the proposals currently being considered which set out a plan of action
for the rating agencies to a. be inducted into the PRI’s movement, and b. have
that induction predicated upon the agencies’ incorporation of ESG concerns into their rating processes. Whilst some
have championed this idea, there is a problem that is outstanding which forms
the crux of the article; whilst the agencies profess to already incorporate ESG
into their rating processes, the facts of this are disputable, and for a number
of reasons. Firstly, as discussed in the article, the rating agencies are no
exactly clear on the levels of ESG incorporation into their analyses, although
all say that it forms a part; the majority of responses revolved around the
declaration that, for their part, they see financial data as the key driver of
their rating analyses, with ESG components playing not much more than a bit
part on their deliberations. Whilst the PRI are, as a result of this
understanding, aiming to encourage rating agencies to increase their usage of
ESG considerations, the responses of the agencies suggest that operationally,
and moreover culturally¸ they are not
seriously inclined to do so. Yet, the biggest issue of all is that the agencies
are notoriously guarded when it comes to disseminating information related to
their methodological processes, and this is for a number of reasons – many of
the reasons relate to protecting their position, and others relate to
protecting themselves when things go wrong or they act in a transgressive
manner. Nevertheless, it is on this basis that the article argues that
inducting the agencies, in their current form and with their current culture in
mind, into the PRI, is a great risk. Whilst that claim may be sensationalised,
to an extent (although this author is clear on the view that agencies need to
be treated with great care when it comes to incorporation), there is a
technical element which describes that risk more accurately. Using the research
of Professor Kern
Alexander,there is an argument
to be had that if the sustainable investment movement continues and regulators
place a value on operating in such a manner, then the linking of, say,
sustainable finance credit ratings to something like bank capital requirements,
could pose a huge risk in relation to the historical conduct of the rating
agencies. In doing so, the sustainable finance movement would, in essence,
become the latest credit rating-related vehicle with which the systemic safety
of the economy could be placed in jeopardy; then, as always here in Financial Regulation Matters, the
obvious question is whether the economy, and society moreover, is healthy
enough to withstand another shock so soon after the Financial Crisis.
Ultimately then, the aim of the article is to present an account of the recent
movements of the agencies, and present an account that is determined to
highlight the potential risks of incorporating the rating oligopoly into such a
progressive and much needed movement; understanding the historical trajectory
of the rating agencies provides the rationale for doing so.

Tuesday, 13 February 2018

Today’s post will preview a recent article by this author
that was published by European Company Law, entitled ‘Scope Ratings: The
Viability of a Response’ (details here).
The short preview will discuss the rationale for the article, some of its aims
and achievements, and then the wider picture with respect to the continuing Viability Of articles, with this article
representing the fourth in the series.

This article, as mentioned above, represents the fourth
edition of the Viability Of series
produced by this author, which is a series which aims to examine and assess the
growing number of alternatives to the Big Three rating agencies (S&P, Moody’s,
and Fitch) that dominate the credit rating marketplace. Details of the first
three are available here, here
and here
(although the titles are different in these last two articles, they are still
in the same series) and this current article operates on exactly the same
lines. The rationale for these articles is straightforward; the proposed
challengers to the hegemony of the Big Three need to be assessed, discussed, and
judged within a practical light because, given the nature of this industry,
even those with good intentions will likely meet an obstacle they could not
have foreseen, or at the least anticipated – the Big Three are well known, but
their practices are inherent, as in any oligopoly, and the effect of that is
felt within every challenger to their position.

This edition of the series focuses upon Scope Ratings, a German rating agency
that is taking a different approach to all the other challengers. The agency is
aiming to become a ‘European alternative to the “status quo” for institutional
investors’, as well as international investors, and to achieve that aim they
are embarking upon a concerted and far-reaching Mergers & Acquisitions
strategy that has the potential to provide a real foundation to their
development, but is also fraught with great risk within the oligopolistic
dynamic that exists within the industry. Starting life in 2002, the firm has
gone on to acquire a number of financial service providers from within the E.U.
in an effort to consolidate expertise that, at least, allows for investors to
consider different options other than what the Big Three provide. A big
breakthrough occurred for the firm’s strategy when, in 2011, the firm was
officially registered by the European Securities and Markets Authority (ESMA)
as a functioning and accredited rating agency; the firm has continued its
aggressive M&A strategy ever since, and now counts major companies like
BMW, Santander, and UBS as its clients. The article goes on to examine the firm’s
recent
acquisition (2016) of Feri rating services, and discusses how the
acquisition has the ability to increase Scope’s fortunes on account of its new
found ability to incorporate significant sovereign bond research into its
offerings. Yet, the firm sees an important part of its development within the
banking sector, and as such has recently moved to open a London branch headed
by a former head of department at Moody’s; how these developments will unfold
in the wake of the U.K’s decision to leave the European Union is another matter
entirely (a point which is raised in another article that has just been
published by this author with the assistance of the European Business Law Review – preview available here).

In terms of setting the structure for the article, it
proceeds by counteracting the analysis of the ‘challenger’ with that of the ‘champion’
i.e. the Big Three, in order to demonstrate the task facing Scope Ratings. Upon
doing so (it is not worth going into detail here; regular readers will know the
views on the Big Three held by this author), the article concludes the ‘champion’
section by discussing the E.U.’s plans to ‘increase competition’ in the
marketplace by way of inducing the newer firms further into the investing
picture (this point was raised in a recent article published by this author
with the assistance of European Company
Law – preview available here);
the overriding statistic that comes from this analysis is that, at the moment,
Scope holds just 0.39% of the market, which makes its progress interesting but
not threatening to the Big Three at the moment. However, as the article
continues by looking at the ‘tale of the tape’, which aims to examine the
reasons why Scope may not make an impact, and the reasons why it may. The
concluding section suggests that 0.39% is simply not a factor in the current
market, meaning that Scope’s ratings offer an addendum at best to the ratings
of the Big Three. Also, if it does grow beyond 0.39%, the likelihood is, at
least according to historical trends, that the Big Three will devour the agency
and simultaneously protect their oligopoly, as any good oligopoly must. Yet,
the article does offer reasons for why Scope may gain more success in the
field, and that is mainly due to the structural differences being proposed by
the E.U. In the American market, any claims of increasing competition within
the rating industry is often nothing more than lip service (as Egan-Jones can attest
to), but in the E.U. the sentiment is much stronger; this may be because of the
effect of the sovereign debt crisis that saw the agencies at the heart of the
unfolding crisis, or just because the U.S.-based agencies have less of an
influence in the E.U. to some relative extent. Nevertheless, there is a growing
sentiment, whether misplaced or not, to enforce competition on the sector, and
that can only go in Scope’s favour. Additionally, Scope is particularly
European in its outlook, and that bodes well if the E.U. decides to incorporate
protectionist ideals into its regulatory framework moving forward. Also, the
specialised nature of Scope’s offerings has drawn in some highly reputable
clients, with the hopeful impact being that more will decide to incorporate
Scope Ratings’ evaluations in their investment decisions. However, a pragmatic
evaluation can only have one outcome: at the moment, Scope is minute compared
to the Big Three, and perhaps the only reason why the oligopoly is allowing the
small firm to grow is because, at the moment, they need not concern themselves
with Scope’s development (one can safely assume they are monitoring their
progress, however).

The effect of this article is to present yet another account
of the incredible dynamics that exists within this, and a number of other
financial service sectors (the same could be said of the auditing field, for
example). The presence of the oligopoly outweighs any smaller undertakings, and
regulatory intervention, and any political movement against its position, which
is why the study of oligopolies and their dynamics is of the utmost importance
(see here
for a good resource on the matter). By continuing the study of the rating
agencies and basing it upon the actualities
of the rating agencies themselves, which is something this author calls for in
every piece, rather than what one may desire
them to be, or what they should be doing theoretically, there stands a chance
at affectual change; other than that, we can expect the continuation of a
process that sees these private firms entrenched within society without any
impactful recourse.

Monday, 12 February 2018

In the second post today, we will take a brief look at the
latest development from a regulator (loosely termed) that we have looked at
many occasions – the Serious Fraud Office (SFO). In responding to actions taken
in the midst of the Crisis, news today confirms that the Office has charged
Barclays for loans the bank made to Qatar at the same time investors from the
Country provided the necessary lifeline which allowed the bank to survive the
Crisis without governmental support. The impact of the prospective action could
be far-reaching, so in this post the details of the allegations will be
examined, as will the potential fallout.

Ultimately, the impact of this charge is proving to be
minimal within the marketplace because market participants realise that there
are so many hurdles before the bank is stripped of its operating licences,
which raises the question of the effectiveness of the SFO’s approach. The SFO’s
approach is correct in terms of it has found illegality, and is proceeding
accordingly. However, the reality of the situation is being played out across
the headlines; impactful regulation and punishment is simply not an option at
the top level of business. The likely situation is that the bank and the charged
executives will allocate remarkable resources to their defence, and the case
will drag on for many more years; what it does tell us, however, is that the
Crisis era and the actions taken within it continue to haunt us still, with the
environment today being directly dictated by the actions, and more importantly
the sentiments, that were developed during that era. On that basis, the SFO is
between a rock and hard place, and with its action being scrutinised by leading
political figures, it is likely the SFO will back down in this instance and
settlement of some sort being viewed as a victory under these circumstances;
that is quite a revealing chain of events all things considered.

In the first of two posts today that focus on the banking
sector, we will start by looking at the troubled bank RBS. We have looked at
RBS on a large number of occasions here in Financial
Regulation Matters, with posts ranging from its incredible
losses since the Crisis, the bank trying
desperately to keep its high-ranking officials (mostly former) out of the court
room, and also its appalling
treatment of SMEs. In continuing the first and third areas of focus, news
recently adds developments to these stories which detail a bank on its knees.
However, by adjoining these analyses with the examination of the Government,
its regulators, and also Parliamentary committees, the bank’s future comes into
focus and is, seemingly, in a particularly precarious phase for a number of
reasons.

Looking first at the issue regarding the bank’s treatment of
SMEs, via its notorious ‘Global Restructuring Group’, we are no strangers here
in Financial Regulation Matters to
the developments in this story, and of the appalling practices of, essentially,
running SMEs into the wall and collecting the pieces and the fees – a practice
made famous by the ‘rogue’
unit within HBoS. The allegations have come in their thousands, with
concerted campaigns aimed at bringing these practices to light, but one can
only focus on the ‘alleged’ practices at the bank because, up to this point,
the FCA has played
its part in protecting the bank by commissioning reports and then heavily
censoring them and releasing only snippets. However, after a movement
by the Treasury Select Committee, headed by Nicky Morgan, it appears
finally that RBS’ practices will come to light so that we can all know,
hopefully, exactly what they have been doing – and then, hopefully, see some
particularly impactful action taken for this despicable practice. It appears
this way because, today, it was announced in the business media that the
Treasury Select Committee has won
its battle with the FCA to release the full report to them, with Friday
being set as the deadline to either publish in full or release the report to
the MPs. It is being reported today, however, that the FCA are still attempting
to resist these attempts, although MPs are growing considerably exasperated at
developments with many now pushing for full publication. The original excerpt
released by the FCA stated that it did not believe that RBS deliberately
undermined companies for profit, although there was ‘widespread
mistreatment of firms’ and that 16% of cases resulted in ‘material
financial distress’; the conflicting information has increased the pressure for
full publication. Speaking to the Treasury Select Committee last week, RBS
bosses were adamant that cases were ‘isolated cases’, although a Labour MP who
has the full report stated that these accounts equated to ‘misleading’ the
Committee, as the report suggests that this treatment of SMEs was ‘systemic’ in nature. It
is this conflict that has led to Morgan demanding that, by Friday, the FCA
release the full report because ‘it is unreasonable that,
four years since the review was commissioned, and 18 months since the FCA received
the final report, such slow progress has been made…’. Yet, today’s headline
in The Guardian that the ‘confidential
report into RBS small business scandal “to be published” may be a little presumptuous,
as the FCA has demonstrated time and time again that it will protect RBS
because of one massive reason – the effect of its publication.

Whilst the endeavours of the Treasury Select Committee is,
on this occasion, to be applauded, the reality of the situation is that the
bank simply cannot afford these details to be published at the moment, and the
FCA know this. This should not be a reason to restrict justice, but the bank is
facing the prospect of declaring its tenth
annual loss and the effects of this scandal, in terms of perception and cost,
could prove to be terminal. It is for this reason that the Treasury, as it was
reported over the weekend, has been cited as approaching the U.S. Department of
Justice to expedite the impending fine coming RBS’ way for its performances in
the U.S. market before the Financial Crisis; reports
suggest that the Treasury is asking the DoJ to bring forward its fine, which is
expected to be more than £5 billion. The suggestion stemming from these
meetings is that the fine could be coming in the next few weeks rather than
months, but the details mask an underlying sentiment; why are the FCA taking on
MPs to protect RBS and why are the Treasury using their political capital to
intervene on the bank’s behalf? There are probably many reasons for this, but
perhaps the most impactful one is that RBS is simply approaching the point of
no return, and the Governmental departments know it. The real question then is
(a) will the bank be allowed to fail, and (b) what would the effect of the
global banking giant be?

What these developments tell us is fascinating. On one end,
there are members of the political elite who are determined to promote justice
in the face of the flagrant disregard for good business practices and, in
truth, illegality. Yet, the developments tell us that the larger picture is
always in focus, and protecting consumers goes out of the window when it comes
to protecting the system; consider
this – the regulator in charge of protecting consumers (it is even in its
name!) is actively preventing
consumers from achieving justice, and the Governmental department which is
tasked with representing the citizens of the U.K., in fiscal terms, is actively working with other
jurisdictional departments to present a more comfortable situation for a bank.
The effect of these developments is far-ranging, and particularly enlightening
to those who choose to observe a shallower level than the systemic level – RBS is
failing because of its incredibly poor performance over the past decades, but it will not be allowed to fail because,
with all the uncertainties in the current climate, its failure will cause
lasting damage. So, what can we learn from this? One thing we can learn is that
the Crisis was a warning that has not been heeded and, ultimately, the problems
that caused the crisis still persist; Friday will be a telling day for a whole
host of reasons.

Thursday, 8 February 2018

In today’s post, the focus will once again be on the massive
retailer Tesco, with news this time relating to a potentially record-breaking
claim making its way up the legal ladder. We looked on Tuesday at the protracted
fraud case involving Tesco executives, which subsequently collapsed, but
today the retailer is making the headlines as part of a concerted legal push
against a number of the top supermarkets in the U.K., all on the same basis. In
this post we will assess the particulars of the claim, and look at the
potential effects for the retailer, and the sector moreover.

On a number of occasions here in Financial Regulation Matters, we have assessed the concepts of
equality and equal-pay between the genders on a number of occasions, with most
posts focusing upon the lack of diversity within companies (see here,
here,
and here).
Today’s post however focuses on the claim from the law firm Leigh Day, acting
as a representative for potentially more than 200,000 Tesco staff, that female
shop-floor staff earn much less than their male counterparts working in the
warehouse/distribution sections of the company; the firm claim that the
resolution of this case could cost
Tesco more than £4 billion in compensation to those affected. The firm is
not only taking action against Tesco, with action against Sainsbury’s
and Asda
already well under way on the same grounds. Although it may obvious to those
who have any connection to anti-discrimination law in the U.K., it is worth
noting that the claim is not based upon the suggestion that Tesco has been
paying men more than women for exactly the same job (which flout every
anti-discrimination law); the case hinges on the concept of ‘equal
value’. Essentially, the question for the employment tribunals, where the
Sainsbury’s and Asda cases are and where the firm hopes the Tesco case will go,
is ‘is the work performed by those on the shop floor of equal value to that of
a ‘comparator’ i.e. ‘someone
of the opposite sex doing a job perhaps traditionally seen as more physically
demanding’. The technicalities will no doubt be difficult to establish, but
the claims by many shop-floor workers revolve around the actual aspects of
their jobs; they too have to do manual-based work, whilst also performing a
customer facing role – for this they receive £8 per hour, whilst their
distribution centre counterparts earn up to £11. In the media today, there has
been reference to the leading case in this particular field when Birmingham
City Council were forced to pay out £1 billion in 2010 on similar claims,
but that case has many different aspects to these cases; this case, and the
other two against Sainsbury’s and Asda relatively speaking, are at a very early
stage with Tesco not even commenting yet, so there will be plenty of twists and
turns (and legal ‘strangulation’) left on these particular stories. So what
then may be the effects of these cases?

The effect of success on the part of the claimants in this
case could indeed be significant, not only on Tesco but the entire sector; for
those with distribution arms to their business, the prospect of making sure pay
is equal across the sectors will have an immediate effect by way of
compensation claims, but then a longer term effect upon one of the two ‘groups’
for want of a better word. If the claim was to be successful, one would surely
imagine that distribution centre workers would see their pay decrease, rather
than shop-floor employees see their pay increase, which will have a number of
effects. However, the impact upon the equal
pay movement that is currently engulfing organisations like the BBC
could be even more significant, and for the better. As with all movements of
this type, there is a need for defined victories, and having the law find in
the favour of the claimants here would be a massive and important victory in
the long road to the eradication of unequal pay. Yet, whilst these developments
should encourage, one should expect these gigantic corporations to defend their
position vehemently, meaning the required change may be some way off.
Nevertheless, today was a small step in the right direction on a critical
journey.

Tuesday, 6 February 2018

Today’s brief post looks at the fraud case concerning three
Tesco Executives that has been rumbling on for months at great expense. Today,
there was a major development which raises the question as to whether the
Serious Fraud Office (SFO) will continue its action against the three
Executives, bearing in mind the many different factors that must now be taken
into consideration; in this post, those factors will be laid before we assess
whether it is (a) worth the SFO continuing its action and (b) what the effects
of that decision, either way, may be.

We
have looked at this case before, albeit briefly, in Financial Regulation Matters when we looked at the decision of the
Financial Reporting Council to discontinue investigations into PricewaterhouseCoopers
(PwC) in the wake of the massive
accounting scandal that saw the SFO fine
Tesco £129 million for the accounting transgression. The current case is
concerned with three individuals in particular – Carl Rogberg, John Scouler,
and Christopher Bush – and charges
against them consisting of fraud by abuse of position and one count of false
accounting; today, after almost four months and on account of Rogberg
suffering a heart attack last week, the presiding judge ruled that it would not
be ‘right
and proper’ to continue the trial in the wake of Rogberg’s illness. In dismissing
the jury, Judge Taylor gave the SFO the option of continuing its action, with a
potential re-trial date of September, setting a deadline of March 2nd
for the SFO’s decision; Judge Taylor’s decision, which is surely the right one,
is based upon the suggestion that the jury would have been influenced by these
developments. Yet, in making this decision there are a number of elements which
the SFO will no doubt be considering.

One of the biggest issues is the sheer cost of the trial,
particularly when paired to the development of the trial before its
abandonment. It has been reported that the case has, so far, cost
upwards of £10 million, and the protracted nature of the case so far will
weigh heavily on the SFO’s decision making process; is the outlay of resources
and time, particularly when one considers the uncertain nature of the outcome,
really worth it for the SFO at the current time when it is fighting
for its future? Predictably, Rogberg’s legal representatives have spoken of
his dismay
at the collapse of the trial and his subsequent inability to clear his
name, whilst the same will probably said of the other two defendants who both
plead ‘not guilty’ alongside Rogberg – Rogberg’s lawyer, for the record, had requested for the trial
to continue in Rogberg’s absence. Nevertheless, the options facing the SFO
are clear.

The SFO must decide whether they are willing to place their
head above the political parapet, because at the moment the SFO is under great
political scrutiny because of the concerted campaign waged against it by the
Prime Minister, as we have already discussed here
in Financial Regulation Matters.
There is a plausible exit for the SFO to take, if it so wishes, on account of
the collapsing of the trial being put down to external and unforeseeable
influences like Rogberg’s heart attack, the Judge falling ill when summing up,
and issues with the jury; the question is can this failure to see through a
prosecution really be laid at the feet of the SFO? Probably not, although some
will try, is the likely answer, but the consequences for ordering a retrial and
then failing will be massive for the SFO in its current predicament, so
perhaps, regrettably, the SFO will have to take this loss on the chin and move
forward. In its favour, this chain of events is unlikely to cast a lasting
negative shadow over the work it does, because recently it has been successful
on a number of fronts, and these successes can be championed as to why it
should not be consumed into the National Crime Agency, as would be Theresa May’s
wishes; the decision in March will be a big one for the future of the SFO,
potentially.

Monday, 5 February 2018

Yesterday Financial
Regulation Matters was a year old and, coincidentally, a number of stories
covered throughout the first year of the blog have had some significant
developments over the past few days; so, in today’s post, we will have a whistle-stop
tour of these developments and ask how the recent developments may impact upon
a number of parties concerned with these impactful business stories.

Nevertheless, how this development affects South Korean
business and politics is still to be decided with a number of aspects still to
be played out. For example, will Samsung (via Mr Lee) now attempt to repair the
reputational damage done to it and other chaebols, or will it simply continue
down the same path on the back of what has been particularly lenient
punishment? The backlash felt against the political and business structures
within the country suggests that Samsung must now embark upon a concerted
campaign to distance itself from the murky waters of South Korea’s elite, but
doing so is much easier said than done. Additionally, any attempts to do so
must be genuine and forward-looking, because the consequences for not doing so
i.e. conducting a superficial PR campaign in the wake of Mr Lee’s release, may
cause lasting damage to the social fabric within the country, such is the
importance of the chaebols to South Korea and its make-up.

We have looked at the continuing struggles of the American banking
giant Wells Fargo on a number of occasions: firstly with the discussion about
its attempts to repair the massive reputational damage suffered from the ‘fake
accounts’ scandal that has consumed the Bank’s organisational responsibilities;
we then looked at the effects of the news that original predictions for the
amount of fake accounts created was conservative, with millions
more predicted and confirmed. As the Bank continues to struggle, news today
from the Federal Reserve (Fed) is having a massive impact upon the bank’s
fortunes, with the Fed prohibiting
the bank from growing past its $1.95 trillion in assets. This unusual (and,
arguably, sensible [although there are clear counterarguments]) approach has
caused massive waves within the banking and financial communities, with Wells
Fargo CEO stating that the move will cut the bank’s annual profit by almost $300
million, potentially rising to $400 million; whilst this figure is
particularly insignificant in terms of losses for an organisation this large,
the fear is that to be regulatory restrained within the current climate could
lead to massive losses in light of the growing influence and profitability of
the bank’s major competitors. TheNew York Times discussed today how the
aim of the move is to hold
the bank’s Board accountable, because the prohibition can only be lifted
once the company demonstrates that it has created and implemented new and more
effective corporate governance controls. Yet, the obvious response to this move
was one of panic, relatively speaking, within the marketplace, with its shares plunging
almost 8% on the back of the news, and a number of advisory firms
downgrading the viability of investment within Wells Fargo shares. However,
there are a number of considerations to be had with respect to the Fed’s ‘cease-and-desist’
order today, with the underlying issue being one of sentiment.

The real question is what is the Fed’s sentiment in
appropriating the cease-and-desist order, and will it hold under pressure? This
is a potential issue because if the sceptics are right, and the bank starts to
lose substantial ground to its competitors because of the order, then what
happens if the bank starts to fail? The Fed will then be faced with the
prospect of either (a) letting the bank fail because of its poor governance
standards and lending real legitimacy to its enforcement actions, or (b) caving
under the pressure of a colossal failure and, at once, fundamentally
legitimising and confirming the presence of ‘too-big-to-fail’. It is worth
noting that the superficial sentiment of the Fed’s actions is a positive one,
because it will likely force an organisation that has proven to be inadequate
in terms of its internal governance procedures to make radical changes, but if
the bank and its board calls the Fed’s bluff, the whole scenario could turn
into something rather monumental in an instant.

One clear effect is that one can extract from these events,
and how they have been reported, that the financial data i.e. what you can ‘sell’
or promote, is all important whilst protecting jobs is far from high on the
priorities of these socially important organisations. In the current climate,
positivity is worth more than almost anything and, in developing this narrative
of strong data trumping almost everything, the positive spin is being systemically
cultivated. The obvious thing to say on the back of that is that perhaps this
has always been the way, but that does not mean that it is correct. In
uncertain times, as these surely are, some sense of job security should be
aimed for by these massive employers, but quite often the opposite is true;
whilst technological advances are indeed making many of the workforce obsolete,
the impact of that within the current climate is significant because the
safety-net for those removed from the workforce is being constantly deteriorated
– a show of support for employees from Governmental entities would be
particularly welcome, but it is unlikely.

** As the blog is a year old, I would like to take this
opportunity to sincerely thank everybody for their support over the past year;
the readers, followers, supporters, and contributors, are all very much valued
by the blog and the aim now for year 2 is for the blog to go from strength to
strength with your continued support. If there is something that you would like
to comment on for the blog, your contribution would be most welcome!

Contributions are welcome to this blog. If you would like to contribute regarding any area of financial regulation, then please feel free to email me and submit your blog entry. The content should be concerned with financial regulation, and why it matters, but this is broadly defined. The blog is open to all who are professionally concerned with financial regulation, which may range from an Undergraduate Student interested in writing on the subject, to Professors and industry participants.